Hox Co. &Owl; Co. sign a s-year lease requuring that Owl pay $97,500 annual paym

Question

Hox Co. &Owl; Co. sign a s-year lease requuring that Owl pay $97,500 annual payments to Fox. The lease term and 1st annual payment begins 1/1/18. Owl pays the insurance and any maintenance costs to 3rd parties, but also pays a $4,500 annual property tax that is included in each lease payment. Fox paid $442,500 to buy the equipment immediately before signing the lease, estimates its useful life is 7 years with no residual value, and used an implicit rate of 9% to determine annual payments. If Owl had decided to get a loan to buy the equipment, the borrowing rate would be at 8%. Present values $401,025 using 8%, both rates known to Owl Owl uses only lease and it contains a bargain purchase option, what is Ow's of the minimum lease payments using 9% is $394,290, and straight-line for book depreciation. Assuming this is a capital 2021 lease depreciation expense?

Explanation / Answer

Since it is a capital lease owl will be allowed to claim depreciation as an expense in the books of accounts.

Under Stright line method of depreciation same amount of depreciation is charged every year. The same is calculated as under:

Annual Depreciation = (Cost of asset-residual value )/leased terma

So, in the given Question,

Depreciation for 2021=442500/5

=88500

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